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Private equity investing in ambulatory surgery centers: part I

First Surgical Partners, Inc. , a company with two ambulatory surgery centers (ASCs) and a general acute care hospital in the Houston-area, has just announced that it is considering a going-private transaction where the company would no longer be a public reporting company and that its shares would no longer be traded on any exchange and/or quotation system. From a press release on Business Wire, First Surgical Partner’s newly named Special Committee has determined that “a going-private transaction is the best option for [them] and its stockholders and engaged a financial adviser to provide both a valuation of [the company] and a fairness opinion in connection with a going-private transaction. Such a transaction would be contingent upon certain customary closing conditions, including obtaining the necessary financing to fund payment of any merger consideration to the non-continuing stockholders.”

The First Surgical plan is one example of the impact of private equity's ongoing interests in the industry. Investors across the country continue their interest in ambulatory surgery centers (ACSs), with a growing emphasis on companies; with a specific focus – i.e. pain management, ophthalmology or orthopaedics. In the U.S., more than 22 million surgeries a year are performed in over 5,000 ASCs. In this country, most ASCs are licensed, certified by Medicare and accredited by one of the major health care accrediting organizations.

As has been noted by Ambulatory AlliancesPresident Blayne Rush, ASCs are poised for increased interest from private equity groups and other financial investors. "I believe that now and in the future, financial buyers — that is, private equity groups — will outpace all of them as far as price paid," Rush stated in a May 2012 issue of Becker’s ASC Review. Rush continued, opining that higher prices are linked to a number of factors; “private equity groups are typically paid on a ‘two-and-twenty’ basis, in which they receive 2% of their payment on the amount earned under management and 20% of the gain in the value of the fund. Funds are typically set up with a 10-year fund life and six-year investment duration, but if the group does not deploy the money, they are forced to repay the 2% management fee. In many cases, that money has already been spent by the time the group is asked to repay the funds, so groups will be looking for new investment opportunities.“

A constant challenge for the ASC industry, like many healthcare businesses, is how to remain profitable with downward pressure on reimbursements - - - in the case of ASCs, this is especially true since the revised ASC standard rate-setting methodology took effect on January 1, 2011. Under these rules from Centers for Medicare & Medicaid Services (CMS), ASCs receive roughly 45% to 65% of what hospital outpatient surgical departments receive for providing the same services (depending on the particular service). However, beginning January 1, 2013, ASCs will receive an across-the-board 1.3% rate-increase under the 2013 proposed Medicare rates, as released by CMS (Center for Medicare and Medicaid Services) on July 12, 2012. CMS has also proposed the addition of several new procedures to the list of procedures that are payable in an ASC.

Part II and Part III of our series on equity investing in ambulatory surgical centers will examine ASC companies currently backed by private equity and highlight some key diligence and regulatory considerations for investors and companies.

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